Apr 01th

Changes in US Output in Last 10 Recessions / Recoveries

Author: Kenn Lamson

Comments: 0

A corollary to my previous post about US employment trends during the past 10 economic downturns is a pair of graphs showing the changes in economic output over those same recessions and recoveries. These graphs, like those offered in the earlier post, are courtesy of the Minneapolis Fed.

Similar to employment, output fell at a slower rate than many past recessions until about a year into the downturn. At the point where many recessions have ended however, the current one not only extended its duration but worsened in severity.

Output growth since the “recovery” began is more encouraging, however, appearing roughly average of the last 10. However, it should be remembered that thusfar this growth consists almost entirely of a temporary inventory adjustment and was fueled by an unprecedented amount of monetary and fiscal stimulus.

*The start of the recovery is estimated to be 3Q09.

Mar 26th

Weekly Economic Insight, 22 March – 26 March 2010

Author: Kenn Lamson

Comments: 2

The week ending 26 March saw indicators that provided incremental information on housing, the manufacturing sector, the American consumer’s mindset and the overall economy.  The data confirms our thesis that economic growth will continue to be lead by the industrial sector rather than households. We note also that the 4Q09 inventory- and stimulus-driven growth spurt appears to be waning, suggesting a significantly lower 1Q10 GDP print. 

 

RELEASE (leading, coincident or lagging indicator)

 PERIOD ACTUAL EXPECTED (consensus) LAST

HIA COMMENT

Chicago Fed National Activity Index 3-month moving average (coincident)

 February -0.39 NA -0.13

Three of the four broad categories of indicators that make up the index deteriorated, with only the sales, orders and inventories making a positive contribution.

Durable Goods Orders (leading)

 February +0.5% +1.0% +3.0%

Orders excluding transportation rose +0.9% month-over-month.

New Home Sales (leading)

 February 308K 315K 309K

New home sales plummeted for a fourth month, down -2.2% MoM.

Existing Home Sales (leading)

 February 5.02M 5.00M 5.05M

Sales slipped again, dropping -0.6%.

GDP (lagging)

 4Q09 final +5.6% +5.9% +5.9%

The final look at 4Q09 economic growth shaved the rate from earlier reports. Still, the pace of economic growth was the fastest in more than 6 years.

Univ of Michigan Consumer Sentiment (leading)

 March 73.6 73.0 73.6

American consumers’ opinion held steady in March.

                                                                                                                                            

CHICAGO FED NATIONAL ACTIVITY INDEX

As discussed in last week’s Economic Insight, the CFNAI will replace the Conference Board’s Index of Leading Economic Indicators in our analyses. 

The indicators that comprise the Index are drawn from four broad categories:

  • Production and income
  • Employment, unemployment and hours
  • Personal consumption and housing
  • Sales, orders and inventories

A zero value for the index indicates the national economy is expanding at its historical trend rate of growth; negative values and positive values indicate below- and above-average growth, respectively.

Month-to-month movements can be volatile, so the Index’s 3-month moving average is used to show a more consistent picture of national economic growth.

When the 3-month moving average value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the 3-month moving average value moves above -0.70 following a recession, there is an increasing likelihood the economic contraction has ended.  When the 3-month average moves above +0.70 more than 2 years into an economic expansion there is an increasing likelihood that a period of sustained inflation has begun.

February’s 3-month moving average decreased slightly from January but was higher than at any point since December 2007. The negative reading suggests US economic growth is below its historical trend and that there is low inflationary pressure.

DURABLE GOODS ORDERS

While the overall orders figures fell short of consensus expectations, the important manufacturing sector once again showed solid growth.  Month-over-month growth in new orders was seen in 4 of 8 major industry groups surveyed, including machinery (+4.7% and fabricated metal products (+1.9%). Weakness was centered in electronic equipment (-3.3%) and transportation equipment (-0.7%). 

January’s durable goods inventory figure was revised upward to show +0.1% month-over-month growth, making February’s +0.3% figure the second consecutive month of inventory growth. Perhaps US manufacturers have finally seen the bottom of the inventory cycle that’s been long expected.

Durable goods orders (red) and consensus expectation (green), Jan 2000 – Feb 2010

 

EXISTING AND NEW HOME SALES

According to the National Association of Realtors, sales of existing homes dropped once again in February, following the combined 23% decline in December and January. As noted in earlier commentary the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market continues to be supported through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will likely rise if purchases are ceased.

The NAR report also showed that the reported estimate of existing homes for sale rose for the third consecutive month, by +9.5% to 8.6 months of inventory. Also, the median home prices were essentially flat at $165,100 while the average price fell to $210,500. Lower prices are a logical outcome of lower demand and increased supply. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market.   According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

The decline was not adversely affected by the weather, as the Northeast and Midwest rose but South and West decreased. 

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen, in this case from 8.9 to 9.2 months. Unlike the report on existing homes, though, the median and average homes sales prices rose 6% to $220,500 and 5% to $282,600 respectively.

New (white) and existing (red) home sales, February 2005 – February 2010

 “FINAL” GDP

This release is the third and final look into the final quarter of 2009, which once again beat the consensus expectations. The “final” report is based on more complete data than was available at the time of the “preliminary” estimate last month or January’s “advance” estimate.  The report confirmed that fourth quarter growth was dominated by an enormous inventory adjustment. The downward revision from the “preliminary” report a month ago was cause by adjustments to spending on inventories, consumer spending and “nonresidential fixed investment.”

For 2009, this report puts full-year economic growth at -2.4%. 

 Accounting for the additional data released in the “final” report the contributions to growth looked like this:

SEGMENT

CONTRIBUTION

Consumer spending

+1.16%

Gross private domestic investment

+4.39%

Net exports

+0.27%

Government spending and investment

-0.26%

TOTAL PERCENT CHANGE AT ANNUAL RATE

+5.56%

The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels.  In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.

CONSUMER SENTIMENT

The U of M Consumer Sentiment Index held steady at 73.6 for March. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 82.4 in March, the highest reading of this cycle.  Ominously, however, the index of expectations six months from now, which more closely projects the direction of consumer spending, again worsened, declining to 67.9 from 68.4 a month earlier.

As we’ve noted elsewhere, economic improvement appears to be centered in manufacturing, not in housing and employment, two areas much closer to consumers.

 

Mar 24th

Job Growth: Healthcare vs Export Industries

Author: Kenn Lamson

Comments: 0

A friend recently asked my input on a debate he was having with coworkers. As a human resources professional, he and his colleagues are keenly interested not only in capturing clients today for their consulting firm but also in anticipating the cyclical and secular trends that will drive their business in the years to come.  Specifically, he asked which segment of the economy was more likely to be a driver of job growth in the next decade: Healthcare or export industries. To put a finer point on his query, he believes that the aging of the Baby Boom generation will drive demand for healthcare, and therefore growth of healthcare jobs, throughout this decade.  His colleagues, however, believe that exporting to developing nations, in particular to Brazil, Russia, India and China (also known as the BRIC nations) will be the largest source of job creation.  Our conversation allowed us to explore two economic segments that have different fundamental drivers, but each of which may be a leader in the “new economy” in which we find ourselves.  Below I’ve excerpted a few of the observations I made during our conversation.

  • Both healthcare and the maturation of emerging markets (especially the BRICs) will probably be job generators in the next decade. Obviously, one is largely domestically driven (and therefore easier to politically control), the other is not.
  • It’s hard to say, off the cuff, what the magnitude of each might be. Note though that the healthcare industry is considerably larger than the industries benefitting from exports, at least right now. So, just in terms of raw numbers a 5% increase in jobs is a much bigger number in healthcare (16.3MM employees) than in, say, mining and logging (670K employees).
  • Growth in healthcare jobs seem like more of a sure thing; we know absolutely that the Baby Boom generation will press healthcare demand higher until the mortality rate of that generation causes the curve to turn over, in maybe 25 years.
  • If you look at the recent past, healthcare is about the only segment of the economy that’s created jobs through the recession. It’s obviously not that the sector’s been unaffected, but it’s clearly been a source of stability vis-à-vis job creation. I don’t think that will change, by the way, now that the healthcare bill has become law. The jobs might be funded by the government instead of the private sector, but there’ll be jobs nonetheless. The demand’s simply not going away.
  • US job creation to supply developing nations assumes a paradigm shift in the US economy from being a consumer/debtor nation to an exporter/creditor, AND it assumes that those BRIC nations create the correct political and economic environment for their citizens to consume. Foreign citizens would have to buy stuff that the US has produced, not things that’ve been made within the borders of their own countries.  I think those changes are likely to happen but I’d guess it’s a 50-year phenomenon, not a 10-year one.
  • As I mentioned above I think that the transition I describe above — where the US goes from being a net importer/consumer/debtor to a producer of goods (and services, to a much lesser degree) for export and shrinks the trade deficit — is one that will happen. You’re already seeing export-driven industries lead the way out of recession. Unlike healthcare, employment rates in those industries slumped (because foreign demand slumped too, at least until those countries got their feet underneath them) but now have rebounded. They haven’t put on lots of jobs, but they’re probably not far away from outright growth since their workweeks are 40+ hours and wages are stable or rising.
  • The US isn’t used to having to figure out what another country wants to buy and then making it; that mindset’s going to have to shift. Also, you can see the emerging markets countries stepping forward to fill the power vacuum the US has left. It’s hardly a smooth transition though – China’s the obvious candidate to become world’s #1 economic (and military) power, but it’s not as though they’ve solved all of their issues and can really take charge.  They’re worried about inflation and a whole raft of other stuff, not to mention their leaders constantly putting out internal political fires so they can stay in power.  India and Brazil are quite a bit more stable, but Russia’s a one-trick pony and the pony’s called OIL.
  • Interestingly, the phenomenon that might slow that toward the US becoming an exporter is the, well, self-centeredness of the Baby Boomers. As a generation they’ve spent the past 60 years being catered to, spending lots of money they didn’t have in the process. Which brings us back to Boomer demand, with a different flavor. Let me get super-philosophical for a minute: What you saw in the recent passage of the healthcare reform legislation was a signal of a generational shift in the US and in Congress. The Baby Boom generation is taking over from the “greatest generation” and they’re worried about how the cost and availability of healthcare will affect them as they live out their days. Consider: Many of them have pathetically little saved for retirement; what do you think will happen in the next 10 years as they realize they can’t afford to keep the heat turned on, much less pay the mortgage on their third house and put gas in the Hummer, on the pittance they’ve saved?  Yes, my friend, you and I will be called upon to save them from themselves.  Bank on it.
  • Now, this is not to take sides politically, it’s just to recognize a reality. And that reality WILL have a negative impact on US economic growth that WILL hasten the BRIC countries’ relative rise.

Feb 26th

Weekly Economic Insight: 22 February to 26 February 2010

Author: Kenn Lamson

Comments: 0

The week ending 26 February saw indicators that provided incremental information on housing, the manufacturing sector, inflation and the overall economy.  The data confirms our thesis that economic growth will continue to be lead by the industrial sector rather than households.

RELEASE (leading, coincident or lagging indicator) PERIOD ACTUAL EXPECTED (consensus) LAST HIA COMMENT
Case-Shiller 20-city Home Price Index (lagging) December (MoM) 145.90 NA 146.28 Home prices showed a slower rate of decline for the eleventh consecutive month. All 20 cities showed year-over-year improvement in the rates of decline and 4 showed month-over-month price raises. Prices stand at their summer2003 levels.
New Home Sales (leading) January 309K 360K 342K New home sales plummeted for a third month, down -11.2% MoM.
Durable Goods Orders (leading) January +3.0% +1.5% +0.3% Orders excluding transportation fell -0.6% month-over-month.
GDP (lagging) 4Q09 preliminary +5.9% +5.7% +5.7% The second look at 4Q09 economic growth showed higher-than-expected growth, the quickest rate in more than 6 years.
Univ of Michigan Consumer Sentiment (leading) February 73.6 73.7 73.7 American consumers’ opinion slipped back from 74.4 in January, the highest level in 2 years in January.
Existing Home Sales (leading) January 5.05M 5.50M 5.45M Sales plummeted -7.2% after December’s -16.2% drop.

S&P / CASE-SHILLER HOME PRICE INDEX

The Index fell -0.2% month-over-month. While the overall level of home prices appears to be slowly improving, this report suggests a bifurcation of trends. As noted in the table, 4 of the 20 cities saw month-over-month price increases; also, 6 cities saw year-over-year price improvement.  However, 3 cities reported new lows in prices. The Index is down -3.1% year-over-year.

The variance from the price increases reported in the existing and new home sales reports can be explained by the difference in methodology between the measures. As previously noted, the Case-Shiller Index uses only sales of homes in specific markets with two or more transfers; condos and co-ops are excluded. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 14.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Northeast plummeted -35.1% and the Midwest saw a 2.1% increase.

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen, in this case from 8.1 to 9.1 months, and the NAR reported that median and average home prices fell -5.6% to $203,500 and -8.3% to $254,500 respectively from December.

DURABLE GOODS ORDERS

While the overall orders figure spiked on a surge in aircraft orders, if transportation equipment is excluded orders fell a worse-than-expected -0.6%, reversing December’s jump. Month-over-month growth in new orders was seen in 6 of 9 major industry groups surveyed, including transportation equipment (+15.6%) and primary metals (+1.9%). Weakness was centered in the machinery (-9.7%) and “other durable goods” (-0.4%).  New orders rose 3.8% in the important manufacturing sector.

Durable goods inventories continued to fell for the thirteenth consecutive month in January, frustrating those that have for months have predicted increases in production to restock. We expect that this trend will reverse in 2010, however.  The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

“PRELIMINARY” GDP

This release is a second look into the final quarter of 2009, which once again beat the consensus expectations. The “preliminary” report is based on more complete data than was available at the time of the “advance” estimate last month.  The report confirmed that fourth quarter growth was dominated by an enormous inventory adjustment. The upward revision from the “advance” report a month ago was cause by adjustments to spending on inventories, exports and “nonresidential fixed investment.” Imports were revised higher, as was consumer spending.

While one can only infer this conclusion by the consumption trends reported elsewhere in this release (and Thursday’s durable goods orders report), it would appear that most of the restocking was in nondurable goods. The other major categories that comprise GDP also rose:

Accounting for the additional data released in the “preliminary” report the contributions to growth looked like this:

SEGMENT CONTRIBUTION
Consumer spending +1.23%
Gross private domestic investment +4.63%
Net exports +0.30%
Government spending and investment -0.23%
TOTAL PERCENT CHANGE AT ANNUAL RATE +5.93%

The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels.  In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.

For 2009, this report puts full-year economic growth at -2.4%.  We’ll get a third look at 4Q09 GDP, with more complete data, in the “final” report on March 26th.

CONSUMER SENTIMENT

Consumers may be losing faith in the economy’s improvement in recent days; the U of M Consumer Sentiment Index slipped from 74.4 in late January to 73.6. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 81.9 in February, the highest reading of this cycle.  The index of expectations six months from now, which more closely projects the direction of consumer spending, worsened to 68.4 from 70.1.

As we’ve noted elsewhere, economic improvement appears to be centered in manufacturing, not in housing and employment, two areas much closer to consumers.

EXISTING HOME SALES

According to the National Association of Realtors, sales plummeted once again in January as the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market continues to be supported through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will rise as we approach that date and thereafter if purchases are ceased.

The NAR report also showed that the reported estimate of existing homes for sale rose again, from 7.2 months to 7.8 months of inventory. Also, median and average home prices reversed course from previous months, falling -3.4% to $164,700 and -3.1% to $212,000 respectively from December. Lower prices are a logical outcome of lower demand and increased supply. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market.   According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

Feb 20th

“Finding the Bottom”

Author: Kenn Lamson

Comments: 0

Another interesting graphic by VisualEconomics.com using data from Economist Intelligence Unit.  According to this data, most countries (at least those for which there’s sufficient information)  will see positive GDP growth in 2010.  However, as the inset graphic at bottom indicates, unemployment rates remain stubbornly and worryingly high across much of the globe.

Jan 29th

Weekly Economic Insight: 25 January – 29 January 2010

Author: Kenn Lamson

Comments: 0

This wasn’t a great week of data for consumer-related data, with sales of new and existing homes seen to plummet and consumer sentiment improving but still depressed. Manufacturing showed signs of life, with better-than-expected ex-transportation durable goods orders. The week’s capstone was a 5.7% pop in the initial estimate of fourth quarter GDP. A jump was expected, given the boost to consumption provided by the first-time homebuyer tax credit and other stimulatives, the anticipated replenishment of inventories and the rising strength in exports.

RELEASE

(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

Existing Home Sales (leading)

 December

 5.45M

 5.90M 6.54M Sales plummeted in the largest monthly decline since 1968.
S&P Case-Shiller 20-city Home Price Index (lagging)

 November (MoM) 146.28

 146.80

 146.58 Home prices showed a slower rate of decline for the tenth consecutive month. All 20 cities showed year-over-year improvement in the rates of decline and 5 showed month-over-month price raises. Prices stand at their autumn 2003 levels.
New Home Sales (leading)

 December

 342K

 370K 355K New home sales tumbled for a second month, down -7.6% MoM.
Durable Goods Orders (leading)

 December 0.3%

 1.6% 0.2% Orders excluding transportation rose a better-than-expected 0.9% month-over-month.
GDP (lagging)

4Q09 advance

 5.7%

4.5%

2.2%

 The first look at 4Q09 economic growth showed higher-than-expected growth, the quickest rate in more than 6 years.
Univ of Michigan Consumer Sentiment (leading)

 January 74.4

 73.0 72.8 American consumers’ opinion jumped to the highest level in 2 years in the final January reading, outpacing expectations. However, the overall reading remains very low in a historical context.

EXISTING HOME SALES

Government stimulus clearly underpinned the housing market in recent months, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November.  According to the National Association of Realtors, December sales plummeted in the largest monthly decline since 1968 as the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will rise as we approach that date and thereafter if purchases are ceased.

Positively, the NAR reported that median and average home prices rose 4.9% and 6.4% respectively from November. However, those figures must be taken in the context of actual and potential supply; the NAR report also showed that the reported estimate of existing homes for sale spiked from 6.5 months to 7.2 months of inventory. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market.   According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

Existing home sales: 5 years through Dec 09

S&P / CASE-SHILLER HOME PRICE INDEX

The Index fell -0.2% month-over-month. While the overall level of home prices appears to be slowly improving, this report suggests a bifurcation of trends. As noted in the table, 5 of the 20 cities saw month-over-month price increases; also, 4 cities saw year-over-year price improvement.  However, 4 cities reported new lows in prices. The Index is down -5.2% year-over-year.

The variance from the price increases reported in the existing and new home sales reports can be explained by the difference in methodology between the measures. As noted last month, the Case-Shiller Index uses only sales of homes in specific markets with two or more transfers; condos and co-ops are excluded. The Index has declined -29.2% since its peak in the second quarter of 2006. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

S&P / Case-Shiller Home Price Index: 5 years through Nov 09

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 14.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Northeast and West regions saw an uptick; the Midwest reversed November’s gain.  The NAR reported that 374,000 new homes were sold in 2009, a -22.9% decline from 2008.

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen from 7.6 to 8.1 months, and the NAR reported that median and average home prices rose 5.2% and 7.6% respectively from November.

New Home Sales: 5 years through Dec 09

DURABLE GOODS ORDERS

While the overall orders figure fell below the consensus expectation due to weakness in aircraft orders, if transportation equipment is excluded orders rose a better-than-expected 0.9%. Month-over-month growth in new orders was seen in 2 of 9 major industry groups surveyed, including primary metals (+8.1%) and machinery (+6.0%). Weakness was centered in the computers and electronic equipment, especially computers (-3.0%) and electronic equipment, appliances and components (-3.9%).  New orders fell -0.2% in the important manufacturing sector.  Over the past 12 months durable goods orders have dropped -20.2%.

Durable goods inventories continued to fell for the twelfth consecutive month in December, frustrating those that have for months have predicted increases in production to restock. We expect that this trend will reverse in 2010, however.  The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

Durable Goods Orders: 6 years through Dec 09

CONSUMER SENTIMENT

Consumers may be breathing ever-so-slightly easier in recent days; the U of M Consumer Sentiment Index rose to 74.4 from 72.8 in mid-January and 72.5 at the end of December. Friday’s reading represents the highest level in 2 years. That said, they apparently don’t expect much of an improvement in their own personal financial situation despite forecasts by the economy’s cheerleaders.

The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 81.1 in December from 78.0 in November and 66.5 in October.  The index of expectations six months from now, which more closely projects the direction of consumer spending, rose to a still-dismal 70.1 from 68.9.

U of MI Consumer Sentiment Index: 5 Years through Jan 10

“ADVANCE” GDP

This release is a first look into the final quarter of 2009, which beat the consensus expectations handily. The report was dominated by an enormous inventory adjustment that accounted for the majority of the 4Q change. While one can only infer this conclusion by the consumption trends reported elsewhere in this release (and Thursday’s durable goods orders report), it would appear that most of the restocking was in nondurable goods. The other major categories that comprise GDP also rose:

  • Consumer spending (called personal consumption expenditures in the report) rose +2.0%
  • Spending on goods rose +2.6%, driven by nondurables
  • Spending on services rose +1.7%
  • “Real nonresidential fixed investment” rose +2.9%. All of this increase was due to a…
  • +13.3% spike in investment in equipment and computers, while…
  • Investment in structures fell -15.4%.
  • Housing (called real residential fixed investment) rose +5.7%
  • Exports jumped +18.1%, while imports (a subtraction from GDP growth) increased +10.5%
  • Total government spending fell -0.2%
  • Federal government spending increased +0.1%, but…
  • State and local government spending fell -0.3%

The contributions to growth looked like this:

SEGMENT CONTRIBUTION
Consumer spending +1.44%
Gross private domestic investment +3.82%
Net exports +0.50%
Government spending and investment -0.02%
TOTAL PERCENT CHANGE AT ANNUAL RATE +5.74%

Other bright spots in Friday’s report were a +4.8% increase in disposable personal income and a savings rate that crept higher from 4.5% in 3Q09 to 4.6% in 4Q09.

GDP growth: 8 Years ending 12/31/09

The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels.  In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.

For 2009, this initial report puts full-year economic growth at -2.4%.  We’ll get a second look at 4Q09 GDP, with more complete data, on February 26th.

Dec 24th

Weekly Economic Insight: 21 Dec – 24 Dec

Author: Kenn Lamson

Comments: 0

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)
GDP (lagging)

3Q09 final

2.2%

2.7%

3.5%

 The lowered estimate of third quarter economic activity was primarily driven by downward revisions to consumer and business spending.
Existing Home Sales (leading)

November

6.54M

6.25M

6.10M

 Sales spiked as first-time buyers and those purchasing “distressed” homes drove demand.
Consumer Spending (leading)

November (MoM)

0.5%

0.6%

0.7%

 On an inflation-adjusted basis, MoM spending rose 0.2%.
Univ of Michigan Consumer Sentiment (leading)

November

72.5

73.5

73.4

 American consumers’ opinion about the economy remained quite sour in November, although this was the highest reading in 3 months.
New Home Sales (leading)

November

355K

440K

430K

 New home sales tumbled 11% MoM at the same time the prior two months were also revised lower.
Durable Goods Orders (leading)

November

0.2%

0.5%

-0.6%

 Orders excluding transportation rose 2.0% month-over-month.

“FINAL” GDP

This release is a look into the relatively distant past; the 1.3% variance between the initially released figure and today’s final one demonstrates the sometimes substantial revisions that change the image as the picture becomes more clear.  This was our third and last look at 3Q GDP, which was revised downward more than expected.  If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower.  The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical. As a reminder, these are the same categories that were also revised lower in last month’s second, “preliminary” GDP release. Given the historical nature of this data, however, conclusions to be drawn are tentative at best.

EXISTING HOME SALES

Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November.  According to the National Association of Realtors, over half of November’s buyers were “first-time”. Scavenging was also a driver of sales volume, with 33% of November sales either “short sales” or foreclosed homes.  All-cash purchases were 19% of the total.  It’s reasonable to assume that without sharply higher interest rates or other negative factor intervening, we’ll see another surge of first-time buyers in March and April.

The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end in early 2010; it’s an easy bet that rates will rise as we approach that date and thereafter.

Positively, the reported estimate of existing homes for sale continued to fall; the measure now stands at 6.5 months.  However, it must be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market.   According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

CONSUMER SPENDING

Consumer spending continued on its gradual uptrend, albeit at a slower rate than expected.  November’s increase was lead by nondurable items, which jumped 1.4% month-over-month.  The personal savings rate remained at 4.7%, the same as in October. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

CONSUMER SENTIMENT

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, leapt to 79.1 in November from 68.8 in October and 73.7 in September.  The index of expectations six months from now, which more closely projects the direction of consumer spending, rose slightly to a still-dismal 68.9 from 66.5.

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 11.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Midwest region saw an uptick.  As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. Without the seasonal adjustment new home sales are down year-to-date -23.9%.

The inventory-to-sales ratio now stands at 7.9 months, up from October but down from a peak of 12.4 months. As with the existing home sales data, it must be kept in mind that the reported figures ignore the overhang of foreclosed and delinquent properties that have yet to be officially put on the market. The sudden downward move in the new homes sales figures is a reminder of the perils of predicting a rebound in the housing market by extrapolating trends based on sketchy data.

DURABLE GOODS ORDERS

Orders for new long-lived goods maintained their reputation for volatility, spiking higher in November after a plunge in October and an earlier surge in September. Growth in new orders appeared broad-based, including communications equipment (+4.0%), computers & electronics (+3.7%), machinery (+3.5%) and electrical equipment (+3.2%). Weakness was centered in the transportation equipment, especially nondefense aircraft (-32.6%) and defense aircraft (-3.2%). Over the past 12 months durable goods orders have dropped -21.6%.

Durable goods inventories continued to fall in November, frustrating those that have for months have predicted increases in production to restock. The relatively broad based gains in new orders and the slow but (relatively) steady growth in the industrial sector may portend the end of this trend, however.  The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

Nov 25th

Weekly Economic Insight, 23 November – 27 November

Author: Kenn Lamson

Comments: 0

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)
Existing Home Sales (leading)

October

6.10M

5.70M

5.57M

 Removing seasonal adjustments that call into question the accuracy of the “headline” figure, existing home sales rose 6.6% from September and 20.8% from a year ago.
GDP (lagging)

3Q09 preliminary

2.8%

2.8%

3.5%

 The lowered estimate of third quarter economic activity was primarily driven by an upward revision to imports and downward revisions to consumer and business spending.
S&P Case-Shiller 20-city Home Price Index (lagging)

September

146.5

NA

146.0

 The rate of price declines fell for the fifth consecutive month, to -9.4% compared to the same month last year.  Nineteen of the 20 MSAs showed year-over-year improvement in prices and 9 showed month-over-month raises. Prices stand at their autumn 2003 levels.
Durable Goods Orders (leading)

October

-0.6%

0.5%

2.0%

 Orders excluding transportation fell -1.3% and excluding defense-related items rose 0.4%.  Monthly bright spots included orders for primary metals (+3.6%), electrical equipment (+2.7%) and nondefense aircraft and parts (+50.8%). Weakness was seen in defense aircraft (-6.5%), computers (-7.2%) and machinery (-8.0%). Over the past 12 months durable goods orders have dropped -23.0%.
Consumer Spending (leading)

October (MoM)

0.7%

0.5%

-0.6%

 On an inflation-adjusted basis, MoM spending rose 0.4%.
Univ of Michigan Consumer Sentiment (leading)

November

67.4

67.0

70.6

 American consumers’ opinion about the economy remained very sour in November. October’s figure was revised upward from 66.0.
New Home Sales (leading)

October

430K

410K

405K

 New home sales have risen 31% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 6.7 months, down from a peak of 12.4 months.

Positively, the estimate of housing stock outstanding continued to fall; the measure now stands at 7 months.  Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November.  The housing market’s also being supported in a less obvious way, through the Federal Reserve purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns.

This week’s release is our second look at 3Q GDP, which was revised downward as expected.  If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower.  The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical.

Orders for new long-lived goods rebounded lower from a surge in September. While a useful anticipatory measure of manufacturing sector activity, the data on durable goods orders is a very volatile series.

As expected consumer spending data was boosted by the “cash-for-clunkers” program. Personal savings declined slightly, to 4.4% from 4.6% in September.

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, fell to 68.8 from 73.7, which was the highest in a year.  The index of expectations six months from now, which more closely projects the direction of consumer spending, decreased to 66.5 from 68.6.

The margin of error for New Home Sales 6.2% month-over-month increase was 17.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the gains were not distributed evenly across the US, as the South saw most of the uptick.  As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. The declining volume of new homes for sale reflects both that purchase activity has increased and that, as indicated in the recently discussed construction statistics, homebuilders have slowed the pace at which they’ve added to the housing stock.

Oct 30th

Weekly Economic Insight: 26 Oct – 30 Oct

Author: Kenn Lamson

Comments: 0

Many of this week’s releases failed to reach the consensus estimates, weighing on an already heavy-feeling market.

Arguably the “less negative” print on the Case-Shiller Home Price Index is due to bargain hunting in deeply oversold housing markets. The breadth of the move higher is encouraging, though, as is its four month trend.

Dampening the marginally positive news of the Case-Shiller data was the lower-than-expected new home sales figure. The decline in this report was undoubtedly due to the expiration of the $8000 first-time homebuyer credit. Since new home sales data are recorded when contracts are signed (as opposed to existing home sales, which are recorded at closings) and buyers had to close by November 30 to receive the credit, signing a contract in September is cutting it close.

Although a direct linkage is difficult to demonstrate, we’d argue that the continued exceptionally weak confidence numbers are largely due to the difficult job market. For comparison, consumer confidence readings have historically averaged 72.0 in recessions.

Durable goods orders rose for the fourth time in six months, although this week’s release fell short of expectations. Interestingly, durable goods inventories declined for the ninth consecutive month; 3Q09 was supposed to be one in which companies restocked.

The advance GDP figure, bolstered by consumer spending (particularly through the Cash-for-Clunkers program), surprised on the upside. Residential investment spiked at an annualized rate of 23% during the quarter; clearly the $8000 first-time homebuyer tax credit boosted this figure so it remains to be seen whether this strength will continue. Inventory building contributed 0.9% to GDP (given the decline in durable goods inventories noted above, this must’ve been driven by nondurables), and business investment fell at an annualized -2.5% rate. As we’ve stated before, there was little question that 3Q09 GDP would be substantially positive; the real question surrounds the sustainability of that trend, especially when the “stimulus” runs out or is removed.

Like the GDP data, consumer spending was largely driven by the effect of the “Consumer Assistance to Recycle and Save” Act (aka, “cash-for-clunkers”). From August to September, the annualized rate of spending on durable goods, nondurable goods and services fell -7.0%, rose 0.7% and 0.2% respectively. The growth in services spending continues a narrowly positive trend over the past six months. Consumers saved 3.3% of their disposable personal income in September, down from 4.8% in August.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

S&P Case-Shiller 20-city Home Price Index (lagging)

August

146.00

NA

144.23

The rate of price declines fell for the seventh consecutive month, to -11.3% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 16 showed month-over-month raises. Prices stand at their August 2003 levels, and have declined -29.3% from their peak.

Consumer Confidence (leading)

October

47.70

54.00

53.40

Confidence fell to its lowest level since July, as both the “present situation index” and “expectations index” declined.

Durable Goods Orders (leading)

September

1.0%

1.5%

-2.6%

Orders excluding transportation rose 0.9% and excluding defense-related items rose 0.5%. Monthly bright spots included orders for machinery (+7.9%) and defense aircraft and parts (+12.5%). Weakness was seen in nondefense aircraft (-2.1%) and communications equipment (-7.0%). Over the past 12 months durable goods orders have dropped -24.1%.

New Home Sales (leading)

September

402K

440K

429K

New home sales have risen 22% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 7.5 months, down from a peak of 12.4 months.

GDP (lagging)

3Q09 advance

3.5%

3.0%

-0.7%

This stronger-than-consensus release marks the end of the longest and deepest recession of the post WW2 era.

Consumer Spending (leading)

September (MoM)

-0.5%

-0.5%

1.4%

Consumer spending declined -0.3% year-over-year. On an inflation-adjusted basis, MoM spending fell -0.6%.

Oct 05th

Weekly Economic Insight, 28 September – 2 October

Author: Kenn Lamson

Comments: 0

Given the volume of economic data released last week, my absence from our office last Thursday and Friday to attend my 25th (!) high school reunion and again Monday due to illness, I hope readers will forgive the tardiness of our weekly recap.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

S&P Case-Shiller 20-city Home Price Index (lagging)

July

144.23

NA

141.86

Case-Shiller reported a third month of gains for home sale prices. The composite-20 index rose 1.6 percent in July. With the exception of Las Vegas, all metro areas showed gains or flat conditions. Year-on-year rates also improved for a third month, now at minus 13.3 percent for the 20-city Index. Rates of decline in California have definitely come down, now showing year-on-year declines in the mid-teens vs. 20 percent and worse declines earlier in the year. These are exhaustive data but do lag, which is a concern given set backs in new and existing home prices during August.

Consumer Confidence (leading)

September

53.10

57.00

54.10

Consumer confidence deteriorated in September according to the Conference Board’s index. The worse news in the report is the current assessment of the labor market with substantially more saying jobs are hard to get, 47.0 percent vs. 44.3 percent, versus those saying jobs are plentiful, a miniscule 3.4 percent vs. August’s 4.3 percent. This reading indicates bottom line pessimism and points to weak retail sales in the months ahead. The one positive in the report is a continued decline in inflation expectations, at 5.2 percent vs. August’s 5.4 percent and a reflection of lower gasoline prices.

GDP (lagging)

2Q09

-0.7%

-1.2%

-1.0%

We are very much looking in the rear view mirror at this point. But the third estimate for second quarter GDP clearly shows the economy at recession bottom-with the weight of the evidence of more recent data arguing that the recession technically is over. And the component mix for second quarter GDP adds to the argument that the third quarter will be moderately positive. The upward revision was primarily due to higher estimates for business spending on software and nonresidential construction. The latest GDP numbers show the economy at recession bottom with increased likelihood that there will be an inventory boost in the third quarter, resulting in a moderately positive number for overall GDP.

Corporate Profits (lagging)

2Q09

-19.2%

NA

-17.7%

Corporate profits in the second quarter were revised down slightly to an annualized $1.031 trillion from the original estimate of $1.050 trillion and in comparison to the first quarter’s $0.976 trillion. Profits in the second quarter were up an annualized 24.5 percent, following an 85.1 percent surge the previous quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are down 19.2 percent on a year-on-year basis, compared to down 24.8 percent in the first quarter.

Consumer Spending (leading)

August (MoM)

1.3%

1.1%

0.2%

While everyone expected spending to be up due to a surge in motor vehicle sales, unexpected good news was that consumers were spreading some cash around elsewhere, too. Once again, strength was in durables, which jumped 5.3 percent on sharply higher motor vehicle sales. Nondurables were robust also with a 2.3 percent boost while services advanced 0.4 percent.

ISM Manufacturing Index (leading)

September

52.60

53.50

52.90

The ISM’s index points to slow, steady expansion in the manufacturing sector. At 52.6, it’s little changed from August’s 52.9 and is still over 50 indicating that more purchasers are reporting expansion rather than contraction. New orders slowed but still remain very strong, at 60.8 vs. 64.9. Production also slowed, down more than 6 points to 55.7 still indicating a month-to-month increase for manufacturing sales. Employment is steady, little changed at 46.2 and pointing to continued but moderate layoffs. Inventories gave the index a big boost, up more than 8 points to 42.5 to indicate that manufacturers are slowing their draws, the result of production needs and also business planning for continued production needs ahead.

Construction Spending (leading)

August (MoM)

0.80%

-0.10%

-0.20%

The construction sector is seeing notably divergent trends. The good news is that housing is on an uptrend, but nonresidential and government construction outlays are headed in the opposite direction. The boost in spending in August was led by a 4.7 percent jump in private residential outlays. In contrast, private nonresidential slipped 0.1 percent and public outlays dropped 1.1 percent in August.

Unemploy-ment Rate (lagging)

September

9.80%

9.80%

9.70%

The civilian unemployment rate continued its uptrend. The latest rate is the highest since 1983. The U-6 unemployment rate, which includes those who are underemployed or have stopped looking for work, rose from 16.8% to 17.0%.

Nonfarm Payrolls (lagging)

September

-263K

-170K

-216K

The September jobs report was disappointing. August and July revisions were down a net 13,000 (the net declines were worse). By major categories, goods-producing jobs decreased 116,000 in September, following a 132,000 drop the month before. In the latest month, construction jobs fell 64,000 while manufacturing declined 51,000 and mining slipped 1,000. Service-providing losses, however, surged back to a 147,000 fall, after contracting only 69,000 in August. The drop in service-providing jobs was led by trade & transportation, down 60,000, and by government, down 53,000. Trade was tugged down mainly by retail jobs which fell 39,000. Government weakness was led by the non-education component of local government, down 24,000, as revenue shortfalls have forced job cuts despite fiscal stimulus monies. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

We continue to watch the apparent dichotomy between rising consumer spending and declining consumer confidence. One must wonder, with savings continuing to climb and credit balances falling, from where are these monies coming and how sustainable is the increase in spending, particularly on durable goods?

As noted in the table, we expect a slightly positive GDP 3Q09 figure. It’s worth mentioning that the year-over-year percentages become somewhat misleading in that they’re showing growth from substantially lower absolute levels. Also, there’s no guarantee that growth won’t slow again as the stimulus funds are used up.

As we’ve noted in earlier missives, corporate profits in recent quarters have largely been driven by expense reduction, not revenue growth. While in a given quarter, as my business partner says, a dollar of expense cuts is as good as a dollar of sales, clearly driving earnings by slashing costs is an unsustainable longer term strategy. The silver lining is that with much lower expense bases, when the recovery appears, companies will have much greater operating leverage. We will be watching very closely for signs of revenue growth as 3Q09 earnings are announced in coming weeks.

The flip-side of the corporate profits data is, of course, the unemployment figures. We found the reports disheartening, but note that the consensus remains too bullish on both the economy and equity market in our view. With an average workweek of only 33 hours (which declined from 33.1 hours last month) and the U-6 rate at 17.0% (up from 16.8% last month), companies will first lengthen workdays and convert temp employees to permanent ones before actually hiring. The corollary to this situation is that there’s no evidence to suggest wage inflation in the foreseeable future, yet another reason our belief is that we are in a deflationary spiral, not an inflationary one.
Previous
Next